Gold Price Forecast: Seasonalities And Topping Action Hints

January 2, 2020

fine gold

The focus of today’s article is naturally on gold and its price path ahead. But before looking at the lessons from topping action in gold, we’ll dive into a key market of interest for gold. No market exists in a vacuum, and neither does the yellow metal. Let’s discuss its fiat nemesis, the U.S. dollar. You might be wondering why are we discussing the USD Index in such a great detail in the analyses dedicated to the precious metals market (after all, we have separate Alerts for the forex market). There are two reasons: one general and one specific.

The general reason is that in the long run, the price of gold cannot be disconnected from the value of the currency it is priced in, especially if it’s viewed as the key world currency and a safe haven (yes, people view both: gold and the U.S. dollar as safe havens). Moreover, as we showed previously, during big upswings in the USDX, gold can even multiply USD’s movement.

The specific reason is because of the 2019 has just ended. In the previous several years, we saw a very specific seasonal gold price pattern at the beginning of the year. Namely, gold soared, which might be a reason for many people to think that gold will soar in January as well. The gold – U.S. dollar link should help to put this view into perspective.

Let’s take a look at the average True Seasonal price swings before we move to the individual price moves.

Gold and Seasonality

On average, gold tends to rally in the final part of the year, and the USD Index tends to decline. No surprises so far – that’s what happened.

At the beginning of the year, gold tends to rally while the USD’s performance varies. Let’s keep in mind that the above charts are based on the 2002 – 2018 period and looking at the most recent years might provide us with even more accurate insights. Let’s dig deeper.

Gold rallied in early 2019, early 2018, early 2017, early 2016, early 2015, early 2014, early 2012, early 2010, and early 2008.

Gold declined in early 2011, early 2009, and early 2007.

And do you know when the USD Index rallied? In early 2011, in early 2009, and in early 2007. It also rallied in early 2012, in early 2014, and in early 2015.

In other words, half of early January USD’s rallies triggered declines in gold. If the USD Index is very likely to rally shortly – and this is the case – then the better comparison than just taking the previous years into account is to focus on cases when the USD Index rallied. This means that in half (3 out of 6) cases, gold rallied, and that it declined in the remaining cases. The 50/50 performance means that the outlook is not as bullish as the seasonality would have one believe.

The outlook for the USD Index nullifies the positive effect of the seasonality.

Naturally, there are many other things that need to be taken into account while analyzing the market other than just the USD Index and gold’s seasonality. For instance, the analogy between the 2019, 2011, and 2008 tops.

These were the only three tops that formed after gold rallied so sharply that RSI moved above 80, along with relatively huge volume.

In both previous cases (2011-2012 and 2008), gold declined initially after the top and then corrected a bit more than 61.8% of the decline before forming the final short-term top from which the biggest declines started. The 2016 decline was also preceded by a sharp rally and it was also characterized by a temporary move back up – slightly above the 61.8% Fibonacci retracement – before the main part of the slide.

Please note what the RSI indicator did when gold was correcting for the final time before the big slide (2008 and 2012). It moved slightly higher from about the middle of its trading range (50). Exactly the same thing can be said about what happened in gold recently. The RSI behaved just like it did in 2008 and 2012. And what did the gold price report?

Lessons from Topping Action in Gold

Gold moved above the 61.8% Fibonacci retracement without rallying much above it – just like in the previous cases (2008, 2012, and 2016).

The situation is very similar to how gold “kissed the rally goodbye” in 2011, 2008, and also in 2016.

Also, let’s keep in mind the volume, which has been very low recently. When the volume became so low initially, we wrote that this is what often precedes bigger moves. The implications of very low volume turned out to be bullish instead of bearish (we managed to close the previous long position at a profit nonetheless), but… it seems that whatever bullish was likely to happen based on the low-volume situation, has already happened.

We marked the previous rallies that followed very-low-volume sessions with blue dashed lines and we copied them to the most recent low-volume session. The size of the rally that we saw in the last several days is in perfect tune with the previous cases. Consequently, gold is not likely to rally visibly more based on that factor. In fact, the odds are that the rally has already ran its course or is very close to doing so.

The RSI moving to its classic sell level (80) and the sell signal from the Stochastic indicator confirm the bearish outlook for gold. To be clear, day traders may want to bet on gold’s price increase, but we don’t think that it’s a good idea in case of other traders and investors.

Summary

While seasonality would paint a bullish picture for gold going into 2020, the USD Index path just ahead takes that away. This is confirmed by examining gold’s performance in the opening parts of many recent years. This is also supported by gold’s elevated RSI reading and the sell signal from the Stochastic indicator. The current gold price action actually reads like a goodbye-kiss rally from 2008, 2011 and 2016.

The following months are not likely to be pleasant times for anyone who refuses to jump on the bullish bandwagon just because prices moved higher in the previous months. But what’s profitable is rarely the thing that feels good initially. Forecasting gold’s rally without a bigger decline first is likely to be misleading. The times when gold is trading well above the 2011 highs will come, but they are unlikely to be seen without being preceded by a sharp drop first.

Naturally, the above is up-to-date at the moment of publishing and the situation may – and is likely to – change in the future. If you’d like to receive follow-ups to the above analysis, we invite you to sign up to our gold newsletter. You’ll receive our articles for free and if you don’t like them, you can unsubscribe in just a few seconds. Sign up today.

Przemyslaw Radomski, CFA

Editor-in-chief, Gold & Silver Fund Manager

Sunshine Profits - Effective Investments through Diligence and Care

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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